Common Mistakes Employers Make That Cause Disputes

Garry Crossley, BSc, LLB (Hons), MBA, MRICS, Navigant Consulting (APAC) Pte Ltd

It is commonplace for employers to make numerous mistakes on projects that can often lead to
unnecessary disputes.

Proceeding with variations before time and cost are agreed upon

It is not unusual for variations to occur on projects, which may be due to additional or changed
requirements by the employer and/or contractor, or due to external factors which were unforeseeable
by the parties prior to formalisation of the contract.

When the need for a variation arises, decisions are often required to be made by the parties as quickly
as possible, in order to minimise or negate potential impact(s) to the progress of the project. This in
turn can lead to a scenario where the varied works are carried out prior to the parties negotiating
and/or agreeing any time and/or cost implications.

Proceeding with varied work prior to formal agreement between the parties may lead to a scenario
where the time/cost implications of a variation may be higher than the employer had anticipated. As
such, had the parties negotiated prior to commencement of the variation, the employer may have
reached an alternative business decision on whether the variation was worth the impact had it been
aware of the cost and/or time implications at the outset.

Using Requests for Information and contract interpretations to correct errors or redesign the
project

Contract drawings and/or specifications can often contain errors, and required details/information may
be missing which, depending on the responsibility under the particular conditions of contract adopted
by the parties, are commonly resolved by the issuance of a variation by the employer, which in turn
may lead to time and/or cost implications to the project.

Upon discovering errors or missing information within the contract drawings and/or specifications a
contractor is often required to issue the employer with a ‘Request for Information’. This in turn can
lead to a scenario where employers or design professionals use interpretations or responses to a
‘Request for Information’ without considering the consequences, and which may inadvertently cause
additional expense to the contractor that should actually be borne by the employer.

In order to avoid later disputes between the parties due to such a scenario, the employer should
proactively issue variations to the contractor, within which the employer should acknowledge their
responsibility under the conditions of contract and instruct, or preferably agree upon a variation order
with the contractor.

1
Objecting to written notices

Many of the commonly adopted standard forms of construction contract contain provisions which
stipulate the procedures required for contractors to timeously submit notices if events and/or actions
arise that have or may have time and/or cost impacts to the project.

The submission of adequate and timely notices to an employer provides an opportunity for the
employer to assess potential risks as they become evident to the contractor. This in turn enables
potential time and/or cost impacts to the project to be assessed as they occur, which theoretically at
least should be of benefit to both parties by reducing/avoiding disputes at a later date.

Notwithstanding the apparent benefits to both parties in submitting timeous notices, such submissions
by contractors are often met with discontent by employers. In fact, some employers will actively
attempt to discourage the contractor from fulfilling its obligations under the contract to submit written
notices, often on the misunderstanding that the receipt of such a notice may become the catalyst to a
dispute between the parties.

To avoid disputes concerning the lack of timely written notices, employers should discuss notice
requirements with the contractor and encourage them to submit written notices whenever called for in
the contract. This in turn furnishes the employer with an opportunity to consider alternative actions or
solutions if required.

Requiring contractors to finance project variations

Construction is commonly undertaken on the basis that the contractor finances the work as the project
progresses. As the contractor completes elements of the works, the progress is valued and the
contractor is paid for the works it is has undertaken.

Instructed variations are sometimes not paid until work is measured by the employer’s Quantity
Surveyor, and this has the effect of requiring the contractor to finance the employer’s variations. As
such, employers may unintentionally (or intentionally!) take advantage of the contractor when
instructing large value variations, which will take the contractor a considerable time to complete and
to recoup its initial outlay. This in turn can lead to potential cash-flow issues for the contractor, which
in turn may impact the contractor’s ability to finance the remaining works.

In order to avoid a potential dispute when an employer requires a large value variation, the parties
should try to negotiate and execute a prospectively priced variation order. Once executed, the
variation order can be added as a pay item to the schedule of values and the contractor can seek
payment routinely as the variation work is installed.

Refusing to deal with extensions of time in a timely manner

The majority of variations are incorporated by contractors without causing an impact to the project
schedule, however some will. The timing of a variation in relation to the stage of the project may lead
to some employers holding off from issuing an extension of time. For example, if a variation is issued
in the second week of an eighty week project, the employer may try and delay the issuance of an
extension of time on the basis that the variation may ultimately have a lessened impact than that
claimed by the contractor.

2
Such inaction by the employer may lead to the contractor inadvertently accelerating the works to
minimise its potential exposure, even though the delay was not due to its own actions. This in turn
may lead to further complications that could lead to an unnecessarily complex (and often expensive)
dispute developing between the parties – which would have been avoided if the employer had adhered
to the conditions of contract and granted an extension of time when the impact occurred/became
apparent.

Refusing to deal with indirect costs when variation orders are issued

As with the extension of time issue, many employers refuse to deal with the indirect impact of
variations that effect matters which are often difficult for a contractor to accurately quantify such as
lost productivity, extended site costs, etc.
It is well documented that multiple variations can cause indirect costs that are far in excess of the
direct costs. Indirect cost claims often arise at the end of a project as a consequence of the employer
refusing to deal with them as they occur throughout the progress of the project. A way to avoid end of
project claims is for the employer to work with the contractor when a variation order is being
negotiated in order to pre-agree set rates for potential indirect costs that may become a consequence.
As such, reasonable indirect costs should, where possible, be included in the variation order.

Summary

Construction projects are a fertile field of endeavor, ripe for disputes. There are many parties involved
in a construction project and the opportunity for things to go awry is significant. However, many
disputes are self-inflicted. Employers who make one or more of the mistakes above invite such
disputes. Each is avoidable if the employer adheres to the terms of their contract, deals with the
contractor fairly, and proactively addresses issues as they arise.

Furthermore, it is of the upmost importance that all parties involved in construction projects should
ensure that adequate, accurate and where possible agreed records are maintained throughout the
progress of the project, thus ensuring that contemporaneous evidence is readily available should a
dispute arise between the parties.

It is also important to highlight that the most successful projects (for all parties) are those where
communication and relationships, however strained, are managed and maintained throughout the
duration of the project. Try and form open and honest relationships from the outset, after all, the
parties both have vested interests in the project being a success. The employer wants its project to be
completed on time and as specified, therefore enabling it to use the project and commence a revenue
stream for its investment. In turn the contractor needs to complete the project as quickly as possible
and within specification, which ultimately should enable the contractor to actualise a well-deserved
profit!

3
Garry Crossley

Garry Crossley is a Managing Director in the Global Construction Practice

of Navigant in Asia and currently based in Singapore. He advises clients
internationally on project and programme delivery, strategic issues,
contractual risks, contract strategy and due diligence and has over 27 years'
experience in Utilities, Oil & Gas, Petrochemicals, Building and
Construction, Infrastructure, Transportation, and Aerospace sectors
throughout Asia, the Middle East, Eastern and Western Europe, and Africa.
Garry has also acted as expert advisor and Expert Witness on delay disputes
in arbitration and litigation.